The Sensex, the benchmark index of the Bombay Stock Exchange, closed at 12,595.75 points on Monday, but not before it fell to a low of 12,402.84, perilously close to the important level of 12,378 — a strong support level for the index on its way down.

Going forward, the markets look distinctly weak and, purely technically, they are set to test new lows.

The support level of 12,378 is still intact and it might still offer support to the falling Sensex.

However, if the Sensex closes below this level, there will be panic on the bourses, which might lead to a sharp fall, with the next support coming at 11,676 points, following which there is an immediate support at 11,422 points.

Solid support is expected only at 10,942 points and as of now, I expect this to be the bottom of the market in the short term.

On Monday, the Sensex fell to its lowest in two months. The main reason for the fall was heavy selling across the board by funds and traders on concerns over the effectiveness (or ineffectiveness) of the package cleared by the US to tackle the financial crisis in that country. Most people believe that the package falls short of what is needed to stem the crisis.

And the situation has worsened since the bailout package was first suggested. Over the weekend, Belgian, Dutch and Luxembourg governments were forced to rescue financial services company Fortis NV and it looked like the UK government would have to do the same with mortgage lender Bradford and Bingley Plc. (the UK eventually nationalized the firm on Monday).

The broader Nifty index of the National Stock Exchange is likely to test its support at 3,781 points, but this support level has now become weak.

The next big support for the Nifty will now come at 3,547 points. If the index falls below this, it could plumb greater depths and the short-term bottom is now placed at 3,197 points.

Over the next few days, I see more losses on Tuesday, some consolidation on Wednesday and a possible recovery on Friday. Investors would do well to wait for the market to stabilize before taking fresh calls.

There will be good opportunities for short-term traders (day traders) in the coming days, but for medium- to long-term investors, there is more pain left and I’d suggest that they try and average their portfolio at the bottom levels mentioned above.

The local markets continue to witness a crisis in confidence. Foreign investors continue to withdraw money from the market and investors are waiting anxiously to see what will happen next on bourses that have steadily moved south since the beginning of the year.

This column has been warning that the markets will likely touch new lows. Monday’s Ahead of the Ticker warned that in technical terms, the markets are weak and that they could see a sharp fall.

In keeping with expectations, the markets fell sharply on Monday, but then bounced back.

Vipul Verma is a Delhi-based investment adviser. Your comments and questions are welcome at aheadoftheticker@livemint.com.

To read all of Vipul Verma’s earlier columns, go to www.livemint.com/aheadoftheticker